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Drivers of land prices: But how fast, how far?

If you are in the market for farmland, is there more or less available for sale? And what is pushing and pulling on the price? If you are willing to buy at today’s prices, how high can you go, and what do you decide to charge, if you have some for sale? There is more economic black and white to those answers than shades of gray.

Purdue economists gathered farm lenders, farm managers, rural appraisers and other rural business consultants to get some answers to those questions. Their report indicates that the farm business professionals covered a wide range of thought. Forty-one percent believe there is more land being sold than in 2010, and a similar amount says there is about the same. That represents a significant increase in those believing more land was being sold than in 2010, and a significant decrease in those thinking there is less land being sold. The economists say apparently high prices have convinced some landowners that now is a good time to sell. And they say farmers are the ones who are buying with 73% of transactions, compared to farmer buyers in only 50 percent of the transactions in 2010. Interestingly, the demand is for farmland, not just for a home in the country.

The driver of this trend is the high price of grain, low interest rates, and the potential for inflation of farmland prices. The agricultural professionals, who have daily contact with farmers, expect corn prices to average $5.66 and beans to average $11.59 over the next five years, and they say if production costs do not rapidly increase, returns from crop production will remain strong. With mortgage interest rates at historic lows, the ag professionals are expecting them to remain there, which reflects the mindset of their farmer clientele. Inflation, which was expected to be fairly stable prior to 2007, is now expected to increase at a 3.3% clip by the ag professionals.

What other factors push and pull—and just how hard—on land prices? The economists asked their survey respondents to reflect a wide variety of economic dynamics. They found that net farm income and crop price levels had the greatest influence, followed by returns on farmland, current and expected interest rates, and returns on competing investments. Livestock price levels, current US farm policy, and U.S. inflation provide small positive contributions to the land market. The group saw the growth rate in farmland values slowing considerably. Fifty-nine percent of those ag professionals who were surveyed thought farmland values would be higher five years from now, by an average of 12.4 percent. Nineteen percent of those surveyed thought land prices would decline, by an average of 11.9 percent; and 22 percent did not expect any change in land values 5 years from now.

What would make farmland prices continue to rise? The ag professionals listed a half dozen reasons:

• Strong demand for corn from the ethanol industry because of biofuel mandates • Strong soybean export demand • 2011 U.S. corn and soybean crop that is average or below average • Moderate increases in input costs for corn and soybeans, keeping crop production margins well above historic averages • Low long term interest rates • Little change in the amount of land available for sale

And what would influence land prices to either remain steady or decline in value:

• Sharp decline in corn and soybean export demand • Sudden change in the U.S. policy away from providing biofuel subsidies and mandating usage levels • Sharp rise in interest rates because of a downgrade in the credit rating of U.S. government debt obligations or increased inflation fears • Exceptionally large 2011 corn and soybean crop • Sharp rise in crop input prices reducing crop production margins • Further slowing of world growth because of sovereign debt problems, including the U.S. • Strong supply response resulting from capital investments in agricultural production stimulated by high grain prices • U.S. recession brought on by U.S. debt problems or default • Some combination of the above or some unknown development

Summary:Demand for farmland continues upward, both in price and in intensity of demand by farmers. This is driven by high crop prices, expectation for that to continue, low interest rates, and the potential for land values to inflate. Agricultural professionals say there is a 59 percent chance for land prices to be higher five years from now, and only a 19 percent chance for prices to be less in five years. Drivers of land prices are many, but major dynamics include the ethanol industry, soybean export demand, long term interest rates, and changes in the amount of land available for sale.